Lira’s crash stuns Japan’s mom-and-pop investors again

The Turkish lira plummeted as much as 12% against the yen on Monday. (AFP pic)

BLOOMBERG: The Turkish lira plunged as much as 12% against the yen, forcing Japanese investors to liquidate positions in one of their favorite emerging-market trades for the second time this year.

Much of the lira’s Monday sell-off happened about 7.20am in Tokyo, around when Japanese margin-trading firms typically start closing loss-making client positions. Net lira-yen longs held by margin accounts rose last week to the highest level since mid-June, according to data from the Tokyo Financial Exchange Inc.

The drop exacerbated after a tit-for-tat exchange of tariffs by China and the US on Friday spurred a rush for haven assets. Earlier this year too, yield-hungry Japanese retail investors were caught in a flash crash when the yen in January surged against every currency tracked by Bloomberg during the so-called witching hour of the Asian morning.

“Margin accounts have recently accumulated lira longs,” said Toshiya Yamauchi, chief manager for foreign-exchange margin trading at Ueda Harlow Ltd in Tokyo. “Given the lira’s nature as a high volatility currency, the surge in the yen must have triggered stop-losses this morning.”

The lira plunged to a low of 16.1485 against the yen, before paring most of its slide. It traded down 1.3% at 18.0680 as of 3:18pm in Tokyo. The early slide was also echoed in other currency pairs, with the lira dropping as much as 9.9% against the dollar.

The Turkish currency was the most actively-traded emerging-market currency by Japanese retail investors in July, with JP¥1.39 trillion (US$13.2 billion) worth of lira-yen traded that month, according to the latest data from the Financial Futures Association of Japan.

Japanese margin-trading firms tend to evaluate their client positions every day, typically around 7am in Tokyo and liquidate them if losses reach certain levels. As Japanese retail investors are typically thirsty for yield, they tend to accumulate long positions in risk assets, leaving them exposed to a sudden rally in the yen, according to a research paper from the Bank of Japan.

Turkey’s central bank started unwinding last year’s interest-rate hikes in July, after President Recep Tayyip Erdogan replaced the bank’s chief for failing to act in line with his expectations for a rate cut. A run on the lira saw the currency lose about a quarter of its value during August last year, tipping the economy into its first technical recession in a decade.